MATH 3281 Lecture Notes - Exponential Distribution, Life Insurance, Term Life Insurance
14 May 2014
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Unless otherwise indicated, all lives in the following questions are subject to the same law of mortality and their times until death are independent random variables: assume that a decision maker"s current wealth is 10,000. Assign u(0)=-1 and u(10,000)=0: when facing a loss of x with probability 0. 5 and remaining at current wealth with probability 0. 5, the decision maker would be willing to pay up to g for complete insurance. The values for x and g in three situations are given below. Determine three values on the decision maker"s utility of wealth function u: calculate the slopes of the four line segments joining the ve points determined on the graph u(w). Determine the rates of change of the slopes from segment to segment: put yourself in the role of a decision maker with wealth 10,000. 1: consider a game of chance that consists of tossing a coin until a head appears.
